MULTIPLE CHOICE QUESTIONS Which of the following would be considered a service department for an airline? A Maintenance B Information Systems C Purchasing D Flight Catering E All of the above Answer: E LO: Type: N Which of the following would not be considered a service department in a hospital? A Security B Cardiac Care C Patient Records D Accounting E Human Resources Answer: B LO: Type: RC Consider the following statements about service department costs: I.The costs of the Human Resources Department in a manufacturing organization must be allocated to production departments in order to achieve a correct costing of inventory II.The allocation of service department costs requires that an organization select both an allocation base and an allocation method III.Service department cost allocations are more relevant for firms involved in service industries (e.g., repair, health care) than for those involved with manufacturing Which of the above statements is (are) correct? A I only B II only C I and II D II and III E I, II, and III Answer: C LO: Type: RC, N Which of the following methods ignores the fact that some service departments provide service to other service departments? A Direct method B Indirect method C Step-down method D Reciprocal method E Dual-cost allocation method Answer: A LO: Type: RC 44 Hilton, Managerial Accounting, Seventh Edition Consider the following statements about the direct method of service department cost allocation: I.Under the direct method, all service department costs are eventually allocated to production departments II.The order in which service department costs are allocated to production departments is important III.Once a service department's costs have been allocated, no costs are re-circulated back to that department Which of the above statements is (are) correct? A I only B II only C I and II D I and III E I, II, and III Answer: D LO: Type: RC The Milrose Clinic has two service departments (Human Resources and Information Resources) and two "production" departments (In-patient Treatment and Out-patient Treatment) The service departments service each other, and studies have shown that Information Resources provides the greater amount of service Which of the following allocations would occur if Milrose uses the direct method of cost allocation? A Information Resources cost would be allocated to In-patient Treatment B Information Resources cost would be allocated to Human Resources C Human Resources cost would be allocated to Information Resources D In-patient Treatment cost would be allocated to Out-patient Treatment E Out-patient Treatment cost would be allocated to Information Resources Answer: A LO: Type: N Trackster Corporation has two service departments (Maintenance and Human Resources) and three production departments (Machining, Assembly, and Finishing) Maintenance is the largest service department and Assembly is the largest production department The two service departments service each other as well as the three producing departments On the basis of this information, which of the following cost allocations would not occur under the direct method? A Machining cost would be allocated to Assembly B Maintenance cost would be allocated to Finishing C Maintenance cost would be allocated to Human Resources D Human Resources cost would be allocated to Finishing E Allocations "A" and "C" would not occur Answer: E LO: Type: N 45 Hilton, Managerial Accounting, Seventh Edition Which of the following methods recognizes some (but not all) of the services that occur between service departments? A Direct method B Step-down method C Indirect method D Reciprocal method E Dual-cost allocation method Answer: B LO: Type: RC When the step-down method is used, the service department whose costs are allocated first is often the department that: A obtains the highest yield B has the lowest cost C is the newest D serves the greatest number of other service departments E serves the fewest other service departments Answer: D LO: Type: RC 10 Consider the following statements about the step-down method of service department cost allocation: I.Under the step-down method, all service department costs are eventually allocated to production departments II.The order in which service department costs are allocated is important III.Once a service department's costs have been allocated, no costs are re-circulated back to that department Which of the above statements is (are) correct? A I only B II only C I and II D I and III E I, II, and III Answer: E LO: Type: RC Chapter 18 46 11 Duluth Corporation has two service departments (Maintenance and Human Resources) and three production departments (Machining, Assembly, and Finishing) The two service departments service each other, and studies have shown that Maintenance provides the greatest amount of service On the basis of this information, which of the following cost allocations would likely occur under the step-down method? A Machining cost would be allocated to Assembly B Maintenance cost would be allocated to Finishing C Maintenance cost would be allocated to Human Resources D Human Resources cost would be allocated to Maintenance E Allocations "B" and "C" above Answer: E LO: Type: N 12 The Hopwood Clinic has two service departments (Human Resources and Information Systems) and two "production" departments (In-patient Treatment and Out-patient Treatment) The service departments service each other, and studies have shown that Information Systems provides the greatest amount of service Which of the following allocations would not occur if Hopwood uses the step-down method of cost allocation? A Information Systems cost would be allocated to Human Resources B Human Resources cost would be allocated to Information Systems C Human Resources cost would be allocated to In-patient Treatment D In-patient Treatment cost would be allocated to Out-patient Treatment E Allocations "B" and "D" above Answer: E LO: Type: N 13 Which of the following methods accounts for 100% of the services that occur between service departments? A Direct method B Indirect method C Reciprocal method D Step-down method E Dual-cost allocation method Answer: C LO: 1, Type: RC 14 Reno Corporation has two service departments (Maintenance and Human Resources) and three production departments (Machining, Assembly, and Finishing) The two service departments service each other, and studies have shown that Maintenance provides the greatest amount of service Given the various cost allocation methods, which of the following choices correctly denotes whether Maintenance cost would be allocated to Human Resources? Direct Step-Down Reciprocal A Yes No Yes B Yes No No C Yes Yes Yes D No Yes No 47 Hilton, Managerial Accounting, Seventh Edition E No Yes Yes Answer: E LO: 1, Type: N Chapter 18 48 15 Which of the following methods would be of little use when allocating service department costs to production departments? A The direct method B The reciprocal method C The step-down method D The net-realizable-value method E The dual-cost allocation method Answer: D LO: 1, 2, Type: N 16 Ryan, Inc., has two service departments (Human Resources and Building Maintenance) and two production departments (Machining and Assembly) The company allocates Building Maintenance cost on the basis of square footage and believes that Building Maintenance provides more service than Human Resources The square footage occupied by each department follows Human Resources Building Maintenance Machining Assembly 4,000 11,000 16,000 22,000 Assuming use of the direct method, over how many square feet would the Building Maintenance cost be allocated (i.e., spread)? A 15,000 B 38,000 C 42,000 D 53,000 E More information is needed to judge Answer: B LO: Type: A 49 Hilton, Managerial Accounting, Seventh Edition 17 Peterson Company has two service departments (Cafeteria and Human Resources) and two production departments (Machining and Assembly) The number of employees in each department follows Cafeteria Human Resources Machining Assembly 40 60 200 300 Peterson uses the direct method of cost allocation and allocates cost on the basis of employees If Human Resources cost amounts to $1,800,000, how much of the department's cost would be allocated to Machining? A $600,000 B $720,000 C $900,000 D $1,200,000 E Some other amount Answer: B LO: Type: A 18 Durango, Inc., has two service departments (Human Resources and Building Maintenance) and two production departments (Machining and Assembly) The company allocates Building Maintenance cost on the basis of square footage and believes that Building Maintenance provides more service than Human Resources The square footage occupied by each department follows Human Resources Building Maintenance Machining Assembly 5,000 9,000 15,000 22,000 Assuming use of the step-down method, over how many square feet would the Building Maintenance cost be allocated (i.e., spread)? A 14,000 B 37,000 C 42,000 D 51,000 E More information is needed to judge Answer: C LO: Type: A Chapter 18 50 19 Anniston, Inc., has two service departments (Human Resources and Building Maintenance) and two production departments (Machining and Assembly) The company allocates Building Maintenance cost on the basis of square footage and Human Resources cost on the basis of employees, and believes that Building Maintenance provides more service than Human Resources The square footage and employees in each department follow Human Resources Building Maintenance Machining Assembly Square Footage 4,000 10,000 15,000 21,000 Employees 10 15 40 60 Assuming use of the step-down method, which of the following choices correctly denotes the number of square feet and employees over which the Building Maintenance cost and Human Resources cost would be allocated (i.e., spread)? Building Human Maintenance Resources A 36,000 100 B 40,000 100 C 46,000 110 D 50,000 110 E Some other combination of figures not listed above Answer: B LO: Type: A 20 Western, Inc., has two service departments (Human Resources and Building Maintenance) and two production departments (Machining and Assembly) The company allocates Building Maintenance cost on the basis of square footage and believes that Building Maintenance provides more service than Human Resources The square footage occupied by each department follows Human Resources Building Maintenance Machining Assembly 3,500 8,700 9,900 15,000 Over how many square feet would the Building Maintenance cost be allocated (i.e., spread) with the direct method and the step-down method? Direct Step-Down Method Method A 24,900 28,400 B 24,900 37,100 C 28,400 24,900 D 37,100 24,900 E Some other combination of figures not listed above Answer: A LO: Type: A 51 Hilton, Managerial Accounting, Seventh Edition 21 Saunders Company has two service departments (Cafeteria and Human Resources) and two production departments (Machining and Assembly) The number of employees in each department follows Cafeteria Human Resources Machining Assembly 20 30 100 150 Saunders uses the step-down method of cost allocation and allocates cost on the basis of employees Human Resources cost amounts to $1,200,000, and the department provides more service to the firm than Cafeteria How much Human Resources cost would be allocated to Machining? A $0 B $428,572 C $444,444 D $480,000 E Some other amount Answer: C LO: Type: A 22 Hunt Corporation has two service departments (S1 and S2) and two production departments (P1 and P2), and uses the step-down method of cost allocation Management has determined that S1 provides more service to the firm than S2, and has decided that the number of employees is the best allocation base to use for S1 The following data are available: Department S1 S2 P1 P2 Number of Employees 10 20 50 70 Which of the following statements is (are) true if S1 and S2 have respective operating costs of $280,000 and $350,000? A S2 should allocate a portion of its $350,000 cost to S1 B S1's cost should be allocated (i.e., spread) over 140 employees C S1's cost should be allocated (i.e., spread) over 150 employees D S2 should allocate a total of $390,000 to P1 and P2 E Statements "B" and "D" are both correct Answer: E LO: Type: A Chapter 18 52 Use the following to answer questions 23-25: The Dollar Store has a Human Resources Department and a Janitorial Department that provide service to three sales departments The Human Resources Department cost is allocated on the basis of employees, and the Janitorial Department cost is allocated on the basis of space The following information is available: Budgeted cost Space in square feet Number of employees Human Resources $45,000 4,000 Janitorial $30,000 1,000 10 Sales #1 Sales #2 Sales #3 20,000 15 30,000 45 50,000 30 23 Using the direct method, the amount of Janitorial Department cost allocated to Sales Department no is: A $8,571 B $8,654 C $9,000 D $10,350 E $14,210 Answer: C LO: Type: A 24 Using the step-down method and assuming that Human Resources is allocated first, the amount of Human Resources cost allocated to Sales Department no is: A $12,000 B $12,857 C $13,500 D $15,000 E $22,500 Answer: C LO: Type: A 25 Using the step-down method and assuming Human Resources is allocated first, the amount of Janitorial cost allocated to Sales Department no is: A $8,571 B $9,000 C $9,857 D $10,247 E $10,350 Answer: E LO: Type: A 53 Hilton, Managerial Accounting, Seventh Edition Direct and Step-Down Methods of Service Department Cost Allocation 55 Chicago, Inc., manufactures gauges for automobile dashboards The company has two production departments, Molding and Assembly There are three service departments: Human Resources, Maintenance, and Engineering Usage of services by the various departments follows Human Resources Maintenance Engineering Molding Assembly Human Resources -5% 5% 40% 50% Maintenance 10% 40% 50% Engineering -75% 25% The budgeted costs in Chicago's service departments are: Human Resources, $180,000; Maintenance, $270,000; and Engineering, $200,000 The company rounds all calculations to the nearest dollar Required: A Use the direct method to allocate Chicago's service department costs to the production departments B Determine the proper departmental sequence to use in allocating the firm's service costs by the step-down method C Ignoring your answer in part "B," assume that Human Resources costs are allocated first, Maintenance costs second, and Engineering costs third Use the step-down method to allocate Chicago's service department costs LO: Type: A, RC 65 Hilton, Managerial Accounting, Seventh Edition Answer: A Human Resources Maintenance Engineering Total $180,000 270,000 200,000 $650,000 Molding Fraction Amount 40/90 $ 80,000 40/90 120,000 75/100 150,000 $350,000 Assembly Fraction Amount 50/90 $100,000 50/90 150,000 25/100 50,000 $300,000 B First: Human Resources (serves two other service departments) Second: Maintenance (serves one other service department) Third: Engineering (serves no other service departments) C Human Resources ($180,000): Maintenance (5%) Engineering (5%) Molding (40%) Assembly (50%) $ 9,000 9,000 72,000 90,000 Maintenance ($270,000 + $9,000 = $279,000): Engineering (10%) Molding (40%) Assembly (50%) $ 27,900 111,600 139,500 Engineering ($200,000 + $9,000 + $27,900 = $236,900): Molding (75%) Assembly (25%) $177,675 59,225 Molding: $72,000 + $111,600 + $177,675 = $361,275 Assembly: $90,000 + $139,500 + $59,225 = $288,725 Chapter 18 66 Direct and Step-Down Methods of Service Department Cost Allocation 56 Beckers Corporation is developing departmental overhead rates based on direct labor hours for its two production departments, Molding and Assembly The Molding Department worked 20,000 hours during the period just ended, and the Assembly Department worked 40,000 hours The overhead costs incurred by Molding and Assembly were $151,250 and $440,750, respectively Two service departments, Repair and Power, directly support the two production departments These service departments have costs of $90,000 and $250,000, respectively The following schedule reflects the use of Repair and Power's output by the various departments: Repair Repair (repair hours) Power (kilowatt hours) 120,000 Power 500 Molding 500 420,000 Assembly 4,000 60,000 Required: A Allocate the company's service department costs to production departments by using the direct method B Calculate the overhead application rates of the production departments Hint: Consider both directly traceable and allocated overhead when deriving your answer C Allocate the company's service department costs to production departments by using the step-down method Begin with the Power Department, and round calculations to the nearest dollar LO: Type: A Answer: A Repair Power $ 90,000 250,000 $340,000 Molding Fraction Amount 0.5/4.5 $ 10,000 4.2/4.8 218,750 $228,750 B Allocated service department costs Overhead costs, traceable to production departments Total overhead costs Direct labor hours Overhead rate per hour 67 Assembly Fraction Amount 4.0/4.5 $ 80,000 0.6/4.8 31,250 $111,250 Molding $228,750 151,250 $380,000  20,000 $19.00 Assembly $111,250 440,750 $552,000  40,000 $13.80 Hilton, Managerial Accounting, Seventh Edition C Power ($250,000): Repair (120/600) Molding (420/600) Assembly (60/600) Repair ($90,000 + $50,000 = $140,000): Molding (500/4,500) Assembly (4,000/4,500) $ 50,000 175,000 25,000 $ 15,556 124,444 Molding: $175,000 + $15,556 = $190,556 Assembly: $25,000 + $124,444 = $149,444 Understanding Service Department Allocations 57 Consider the following independent cases that relate to service department cost allocations: Case A: Strickland Company has two service departments [Human Resources (H/R) and Information Systems] and two production departments (Machining and Assembly) Human Resource cost is allocated by using the direct method based on the number of personnel in each department For the period just ended, there were 189 employees in Machining, and Machining received $90,000 of H/R's overhead of $200,000 How many employees are in the Assembly Department? Case B: Walter Burke, controller of Alexander Enterprises, wants service department managers to be aware that their use of other service departments costs the firm a substantial amount of money Would Burke prefer the direct method or the step-down method of cost allocation? Why? Case C: Lockwood Company has four service departments (S1, S2, S3, and S4) and two production departments (P1 and P2) The costs of S1 are allocated first, followed in order by the costs of S2, S3, and S4 Lockwood uses the step-down method, and the costs of S2 are allocated based on the number of computer hours used Computer hours logged during the period were as follows: S1, 4,600; S2, 7,100; S3, 10,400; S4, 17,600; P1, 37,000; and P2, 48,600 Over how many hours would S2's cost be allocated? Case D: A recently hired staff accountant noted that given the nature of the allocations, the total cost allocated to production departments is typically less under the step-down method than under the direct method Do you agree with the accountant? Why? Required: Answer the questions that are raised in Cases A, B, C, and D LO: Type: A, N Chapter 18 68 Answer: Case A: Machining has been allocated 45% of H/R's cost ($90,000 ÷ $200,000) because it has 45% of the employees in the production departments Since 189 represents 45% of the total, there are 420 employees in production (189 ÷ 0.45) Thus, Assembly has 231 personnel (420 189) Case B: Burke would prefer the step-down method because service department costs are allocated to other service departments (although not all) Such a practice makes managers aware that services are not cost-free to the organization Case C: 113,600 (10,400 + 17,600 + 37,000 + 48,600) Case D: No Under both approaches, all service department costs are allocated to production departments This process yields equal totals for each method 69 Hilton, Managerial Accounting, Seventh Edition Dual-Cost Allocations 58 Renaissance, Inc., has centralized much of its specialized data processing operation, with the Computer Department performing services for Departments A and B Service hours consumed during quarter no and quarter no follow Quarter no Quarter no A 60 40 B 60 60 Computer Department operating costs were: Quarter no Variable (Per Hour) $50 Quarter no 45 Fixed $40,00 38,000 Company policy currently requires that total variable and fixed costs be combined and allocated as a lump-sum to users based on service hours Renaissance has been financially healthy for a number of years but began to experience problems toward the end of quarter no In response to these problems, management issued a directive to closely monitor costs and computer usage, effective with the start of quarter no Required: A Compute quarter no 1's total computer cost and determine the allocation to Department A and Department B B How much cost would be allocated to Departments A and B during quarter no 2, and how would the heads of these departments likely react to the allocations in light of management's directive? C Assume that at the beginning of quarter no 2, the company switched to dual-cost allocations, with variable costs allocated based on current usage and fixed costs allocated based on long-run average utilization An analysis of projected usage found that work for Department A was expected to consume 55% of the Computer Department's time over the forthcoming year How much cost would be allocated to A and B in quarter no 2? D Given the use of dual allocations, how, if at all, would a short-term increase or decrease in A's current usage affect the quarterly cost allocation that is charged to Department B? LO: Type: A, N Chapter 18 70 Answer: A Variable cost: (60 + 60) x $50 Fixed cost $ 6,000 40,00 $46,00 Total cost Since each department consumed 60 hours of services, the cost would be split equally: $46,000 ÷ = $23,000 B Variable cost: (40 + 60) x $45 $ 4,500 38,000 $42,50 Fixed cost Total cost Department A: (40 ÷ 100) x $42,500 = $17,000 Department B: (60 ÷ 100) x $42,500 = $25,500 The head of A would be pleased because the department's decreased usage resulted in a $6,000 reduction in cost ($23,000 - $17,000) In contrast, the head of B would likely be unhappy Although unable to reduce usage, usage did remain constant—a situation that produced a $2,500 increase in cost ($25,500 - $23,000) despite the fact that overall cost declined C A Variable: 40 hours x $45 60 hours x $45 Fixed: $38,000 x 55% $38,000 x 45% Total D 71 B $ 1,800 $ 2,700 20,900 $22,700 17,100 $19,800 There is no effect on B The variable costs charged to Department A would increase or decrease, with other allocations remaining the same Hilton, Managerial Accounting, Seventh Edition Joint-Cost Allocations 59 Suppose that one hog yields 300 pounds of ham, 200 pounds of chops, and 100 pounds of miscellaneous items The sales value of ham is $1.20 per pound; chops, $1.50 per pound; and miscellaneous items, $0.90 per pound The hog costs $580, and processing costs are $20 Required: A Determine the proper allocation of joint costs to the three products by using the physicalunits method B Repeat part "B" by using the relative-sales-value method LO: Type: A Answer: A Ham Chops Miscellaneous items Weight at the Split-Off Point 300 pounds 200 pounds 100 pounds 600 pounds Relative Proportion 3/6 2/6 1/6 Allocation of Joint Cost* $300 200 100 $600 Sales Value at Split-Off $360 300 90 $750 Relative Proportion 36/75 30/75 9/75 Allocation of Joint Cost $288 240 72 $600 *$580 + $20 B Ham (300 x $1.20) Chops (200 x $1.50) Miscellaneous items (100 x $0.90) Chapter 18 72 Fundamentals of Joint-Cost Allocations 60 Higgins Corporation manufactures two chemicals (Flextra and Hydro) in a joint process Data from a recent month follow Direct materials used: $360,000 Direct labor: $150,000 Manufacturing overhead: $690,000 Manufacturing output: Flextra: 40,000 gallons Hydro: 120,000 gallons Flextra sells for $15 per gallon and Hydro sells for $20 per gallon Required: A Compute the total joint costs to be allocated to Flextra and Hydro B Compute the joint costs that would be allocated to Flextra by using the physical-units method C Compute the joint costs that would be allocated to Hydro by using the relative-sales-value method D Assume that Hydro can be converted into a more refined product, Hydro-R, in a totally separable process at an additional cost of $4 per gallon Hydro-R can be sold in the marketplace for $26 per gallon Compute the net realizable value of Hydro-R If Higgins allocated $800,000 of joint cost to Hydro-R and sold 90% of the production completed, determine the cost of remaining Hydro-R that would be transferred to the company’s month-end balance sheet as finished-goods inventory LO: Type: A Answer: A $1,200,000 ($360,000 + $150,000 + $690,000) B Flextra constitutes 25% of the productive output [40,000 ÷ (40,000 + 120,000)] and would therefore absorb $300,000 of joint cost ($1,200,000 x 25%) C The total sales value of the two products is $3,000,000: Flextra (40,000 gallons x $15 = $600,000) + Hydro (120,000 gallons x $20 = $2,400,000) Since Hydro has 80% of the sales value ($2,400,000 ÷ $3,000,000), the company will allocate $960,000 of joint cost ($1,200,000 x 80%) D Sales value (120,000 gallons x $26 = $3,120,000) - costs beyond split-off (120,000 gallons x $4 = $480,000) = $2,640,000 The total cost of production is $1,280,000 ($800,000 + $480,000) Since 90% of the production is sold, 10% of the cost, or $128,000, remains as inventory 73 Hilton, Managerial Accounting, Seventh Edition Joint-Cost Allocations 61 Ohio Chemical manufactures two industrial chemicals in a joint process In October, direct material costing $120,000 was processed at a cost of $300,000, resulting in 16,000 pounds of Pentex and 4,000 pounds of Glaxco Pentex sells for $35 per pound and Glaxco sells for $60 per pound Management generally processes each of these chemicals further in separable processes to produce more refined products Pentex is processed separately at a cost of $7.50 per pound, with the resulting product, Pentex-R, selling for $45 per pound Glaxco is processed separately at a cost of $10 per pound, and the resulting product, Glaxco-R, sells for $100 per pound Required: A Compute the company's total joint production costs B Assuming that total joint production costs amounted to $500,000, allocate these costs by using: The physical-units method The relative-sales-value method The net-realizable-value method LO: Type: A Answer: A Joint production costs total $420,000 ($120,000 + $300,000) B Pentex Glaxco Pentex (16,000 x $35) Glaxco (4,000 x $60) Pentex-R Glaxco-R Sales Value of Final Product* $ 720,000 400,000 $1,120,000 Weight at the Split-Off Point 16,000 4,000 20,000 Relative Proportion 16/20 4/20 Allocation of Joint Cost $400,000 100,000 $500,000 Sales Value at Split-Off $560,000 240,000 $800,000 Relative Proportion 56/80 24/80 Allocation of Joint Cost $350,000 150,000 $500,000 Costs Past Split-off** $120,000 40,000 $160,000 Net Realizable Value $600,000 360,000 $960,000 Relative Proportion 60/96 36/96 Allocation of Joint Cost $312,500 187,500 $500,000 * Pentex-R: 16,000 x $45; Glaxco-R: 4,000 x $100 **Pentex-R: 16,000 x $7.50; Glaxco-R: 4,000 x $10 Chapter 18 74 Net-Realizable-Value Method, Gross Margin Calculation 62 Douglas Company, a new firm, manufactures two products, J and K, in a common process The joint costs amount to $80,000 per batch of finished goods Each batch results in 20,000 liters of output, of which 80% are J and 20% are K The two products are processed beyond the split-off point, with Douglas incurring the following separable costs: J, $2 per liter; K, $5 per liter After the additional processing, the selling price of J is $12 per liter, and the selling price of K is $15 per liter Required: A Determine the proper allocation of joint costs if the company uses the net-realizable-value method B Assume that Douglas sold all of its production of K during the current accounting period Compute K's sales revenue, cost of goods sold, and gross margin C Is the firm's cost-of-goods-sold figure influenced by the choice of a joint-cost allocation method? Briefly explain LO: 4, Type: A, N Answer: A J (16,000 x $12) K (4,000 x $15) B C 75 Sales Value of Final Product $192,000 60,000 Costs Past Split-Off $32,000 20,000 Joint costs Costs beyond split-off Cost of goods sold $16,000 20,000 $36,000 Sales revenue Cost of goods sold Gross margin $60,000 36,000 $24,000 Net Realizable Value $160,000 40,000 $200,000 Relative Proportion 160/200 40/200 Allocation of Joint Cost $64,000 16,000 $80,000 Yes Cost of goods sold is based on both separable costs and joint cost The choice of an allocation method will influence the amount of joint cost charged to the product Hilton, Managerial Accounting, Seventh Edition Analysis of Joint Costs: Working Backward 63 Barry Company manufactures X-111, X-112, and X-113 from a joint process The following information is available for the period just ended: Units produced Joint cost allocation Sales value at split-off X-111 6,000 ? $104,000 X-112 14,000 $18,400 ? X-113 30,000 ? ? Total 50,000 $ 80,000 $260,000 Required: A Does Barry allocate joint costs by using the physical-units method? Explain B Assume that Barry does not use the physical-units method but instead allocates joint costs by using the relative-sales-value method Find the four unknowns in the preceding table LO: Type: A, N Answer: A No X-112 comprises 28% of the total units produced (14,000 ÷ 50,000); however, the product was allocated 23% of the total joint cost ($18,400 ÷ $80,000) Apparently, then, another method is being used B X-111 has 40% of the sales value ($104,000 ÷ $260,000), resulting in 40% of the joint cost ($80,000 x 40%), or $32,000 This leaves $29,600 to be allocated to X-113 ($80,000 $32,000 - $18,400) The sales values follow by using the same percentages that are used in the cost allocation ($18,400 ÷ $80,000 = 23%; $260,000 x 23% = $59,800) and ($29,600 ÷ $80,000 = 37%; $260,000 x 37% = $96,200) Units produced Joint cost allocation Sales value at split-off Chapter 18 X-111 6,000 $ 32,000 $104,000 X-112 14,000 $18,400 $59,800 X-113 30,000 $29,600 $96,200 Total 50,000 $ 80,000 $260,000 76 Joint Costs; Analysis of Joint Production Process 64 Mercury Corporation allocates joint costs by using the net-realizable-value method In the company's Michigan plant, products D and E emerge from a joint process that costs $250,000 E is then processed at a cost of $220,000 into products F and G Data pertaining to D, F, and G follow Costs beyond split-off Selling price Pounds produced D $50,000 F $27,000 40 10,000 38 4,000 G $25,00 50 2,000 Required: A Allocate the $220,000 processing cost between products F and G B From a profitability perspective, should product E be processed into products F and G? Show your calculations C Assume that the net realizable value associated with E is zero How would you allocate the joint cost of $250,000? LO: Type: A, N Answer: A F (4,000 x $38) G (2,000 x $50) 77 Sales Value of Final Product $152,000 100,000 Costs Past Split-Off $27,000 25,000 Net Realizable Value $125,000 75,000 $200,000 Relative Proportion 125/200 75/200 Allocation of Joint Cost $137,500 82,500 $220,000 B No, the company is losing $20,000: Net realizable value ($200,000) - joint costs ($220,000) C The $250,000 cost is a joint cost between D and E Since product D has a positive net realizable value of $350,000 [(10,000 pounds x $40) - $50,000] and E's is zero, all $250,000 would be charged to D Hilton, Managerial Accounting, Seventh Edition DISCUSSION QUESTIONS Overview of Service-Department Cost Allocation Methods 65 Companies are free to use the direct, step-down, and reciprocal allocation methods when dealing with service-department costs Required: A How does the direct method work? What is its chief limitation? B Is the step-down method an improvement over the direct method? Explain C Which of the three methods is the most correct from a conceptual viewpoint? Why? LO: 1, Type: RC, N Answer: A The direct method allocates joint costs solely to producing departments This method does not allocate costs to other service departments and is based on the erroneous assumption that service departments not service each other B The step-down method is an improvement over the direct method, as it recognizes that service departments service both producing departments and other service departments Costs are allocated accordingly The step-down method is slightly more complex than the direct method, requiring a determination of the proper order of departmental allocations C The reciprocal method is the most correct approach from a conceptual viewpoint This method fully recognizes all services provided by service departments The direct method completely ignores the fact that service departments service each other The step-down method recognizes only some of these services, as once a department is closed out, no cost is reallocated back to it Chapter 18 78 Dual Rate Versus Single Rate 66 Many companies use the dual-rate method of cost allocation Required: A How does the dual-rate method work? B Is there any advantage of the dual-rate method over a method that uses a combined, lumpsum single rate? Briefly explain LO: Type: RC Answer: A The dual-rate method involves creating two overhead rates, one for variable costs and another for fixed costs The variable costs are normally allocated on the basis of short-run usage of the service department's output; fixed costs are allocated on the basis of long-run usage B Yes When a single rate is used, the cost allocated to a user department may be influenced by the amount of service consumed by another department For example, a user department's service consumption could remain flat; yet the amount of cost allocated to that department could increase or decrease over previous amounts based solely on actions of other users Dual rates eliminate this problem 79 Hilton, Managerial Accounting, Seventh Edition ... net-realizable-value method C physical-units method D reciprocal -accounting method E gross margin at split-off method Answer: A LO: Type: RC 57 Hilton, Managerial Accounting, Seventh Edition 39 Which of the following... and "B" above Answer: E LO: Type: N 61 Hilton, Managerial Accounting, Seventh Edition 52 Westside Hospital has two service departments (Patient Records and Accounting) and two "production" departments... 38,000 C 42,000 D 53,000 E More information is needed to judge Answer: B LO: Type: A 49 Hilton, Managerial Accounting, Seventh Edition 17 Peterson Company has two service departments (Cafeteria